Taxing carbon: Still regressive after all these tweaks

Ezra Klein points to this letter (pdf) from the CBO, which gives a more detailed presentation of the proposals outlined in this blog post, and claims that it shows that the task of overcoming the initial regressiveness of a tax on carbon, and indeed making the upshot of such a tax progressive, is a cinch. No, it doesn’t.

In the first place, the CBO letter understates the scope of the problem. It is not just that lower-income households spend a greater proportion of their income on energy than do higher-income ones, but also that the energy purchases that the rural poor go in for are ones which emit more carbon than those of wealthier households. It is not, in other words, simply energy that certain (very often poor) segments of the population spend a disproportionate amount of money on, but especially dirty energy: if the first of the maps linked above can be taken at face value, the difference in the amount of carbon emitted by a South Louisianan as opposed to a North New Jerseyan may be somewhere on the scale of the former’s being two hundred times more than the latter’s, even if the total proportion of income spent on that energy is only five times as much. Since the whole point of a carbon tax is to help to index the cost of living more closely to levels of carbon emissions, those in the red (as it were) on this map will face tremendously huge challenges if such a tax is put in place, especially since many of them live in areas where programs to promote lower-carbon energy infrastructures simply are not in place. Obviously encouraging the development of such programs is a big part of the goal of instituting a carbon tax, but the question is whether the means – in this case, policies that have the potential to bankrupt a great many poor families who lack clean energy options – are thereby justified. (It’s different, in other words, than (perhaps still unjustifiable) “sin taxes” on things like cigarettes, which of course are luxury items even if many poor people do go in for them.) And so it is crucial that we be sufficiently honest with ourselves about the extent of the potential hardships.

But enough about the problems; let’s talk solutions. The CBO letter proposes the following:

Let’s go down the list. As the CBO frankly admits, measure (2) isn’t progressive unless you factor in hypothetical trickle-down effects, and measure (1) is progressive only if the tax reductions are limited to lower income brackets, but even then fails to help households that don’t pay income tax. Measure (3) is progressive but fails to help households without covered earnings (which make up almost half of the households in the lowest fifth of the income distribution), and would also create extra paperwork for employers. Measure (4) could obviously be made to be genuinely progressive, but it wouldn’t help out anyone who failed to file the paperwork necessary to receive the rebate (of which there were approximately 20 million such households in 2006, composed primarily of low-income and elderly persons), and would also – assuming the rebates were targeted in a way that made them genuinely progressive – generate administrative costs and raise compliance issues. (Note that I am pretty much just summarizing the CBO’s own concerns.) Measure (5) would be genuinely progressive, but once again would fail to help households that (as in (3)) don’t pay taxes or (as in (4)) fail to file them. Measure (6) would be mildly progressive but would provide only very partial relief, while measure (7) is genuinely progressive but – this is my own gripe – operates on a shamelessly disgusting “We’re driving up the cost of energy, but here – buy some more cheap food with this fake money” premise that is the worst sort of condescension, measure (8) would be progressive but would require a huge amount of administrative work and a complete overhaul of the existing program, and measure (9) – again, this is my own complaint – gives money away for the sort of expenditures that only wealthy people go in for anyway.

This is not, in other words, a very pretty sight. Even if we count the Food Stamps option, there are really only six possibilities here that will do anything significant to offset the regressiveness of a tax on carbon, and the one of those six – measure (4) – that has the greatest possibility of actually being strongly progressive has the following defects: it (a) demands the filing of complicated paperwork, (b) fails to offer any relief until the end of a cash-strapped year, and then (c) provides that relief in the form of a lump sum of money that is apparently supposed to be carefully conserved over the year to come. (Yeah, right.) Meanwhile, only one – measure (3) – of the remaining possibilities manages to avoid each of these three problems, and it flounders on the fact that it fails to give money to take less money away from the salaries of people who aren’t already being taxed. Each of the others centers on some combination of heavy paperwork, high administrative costs, and the mid-May bestowal of pots of gold that are likely to be spent on Hawaiian vacations if the recipients haven’t frozen or starved over the course of the previous year.

Perhaps I am being too skeptical; I think, though, that I am not. No matter how you spin it, taking a disproportionate amount of money away from poor Americans and then trying to find tricky ways to give even-more-disproportionate amounts of it back to them does not a good public policy make. I would very much like to find a way to use government to encourage the use of cleaner energy (and other greener ways of life), but I am stillprettysure that forcing across-the-board increases in the price of carbon is not (or at least not right now) the right way to do it.

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6 Responses to Taxing carbon: Still regressive after all these tweaks

” I would very much like to find a way to use government to encourage the use of cleaner energy (and other greener ways of life), but I am still pretty sure that forcing across-the-board increases in the price of carbon is not (or at least not right now) the right way to do it.”

Interesting, and probably right. What are your thoughts on flat out subsidizing cleaner energy, to the point that wind/solar/biomass, etc. is competitive with coal/gas on a kw/h basis?

That is the kind of proposal I’m inclined to go in for. I also think that building up mass transit infrastructure – I tend to lean toward buses over trains, for a bunch of un-thought-out reasons – is a good thing. So is congestion pricing, and so are toll roads. And so is the encouragement of local economies, and the subsidization – sometimes – of research into clean energy and carbon-trapping technology. There’s a start for you.